DCBill

How Much Are Fannie and Freddie to Blame?

The minor name-calling and putdowns aside, please draw a distinction between Fannie Mae's "community lendign activity"--basically what they did to get to and over the statutory requirement that "55% of their annual business serve low, moderate and middle income families and those living in central cities and other underserved areas" (Quote is from the law.)--and the yield driven subprime purchases in 2006 and 2007, which severely wounded the company. (Fannie had $40 billion in capital on their books when put into "conservatorship," suggesting to me politics not market concerns as the cause for Paulson's move.)

Hosuing Goals:Fannie regularly took in enough quality business in most of their standard acquisitions which helped them get to about 50% of the needed 55%. It was the last slug which relied on their community lending pproducts and all of the flexible underwriting emouluments, they added.

However, most of those loans perofmred only slightly worse than their very solid standard business. In fact, ALL OF THOSE COMMUNITY LENDING LOANS could have gone belly up, which they never did, and Fannie's losses would have been tiny and overwhelmed by their other positive earnings.

But the purchase of high yielding subprime securities--orignated otuside the F&F systems, by Wall Street with direct delievry from mortagge brokers---is what took the GSEs down.

Again, all the "legendary" Fannie D's were gone by that time and the congressional Democrats, who indeed were GSEs cheerleaders, but mostly becausee the GOP had decided, in the Reagan era, to come after the Rossevelt created Fannie for ideological reasons.

Back to the word combat!